The bank wants a stabilized DSCR I can't hit with 5,000 feet empty

The question is how long you can own this building with the box empty and still be fine, and the answer is a number of months, not a feeling. Work out the carry on 5,000 sf of unconditioned glass in a midwest winter, add the insurance load and the taxes allocated to it, and see how many years of that your residential surplus absorbs. If it's eight years, you're buying a good apartment building with a free option attached. If it's eighteen months, you're buying a leasing project with apartments attached and you should price it that way.

I've held land through longer stretches of nothing happening than most people are comfortable with, and the thing that makes it survivable is that vacant land costs almost nothing to hold. A vacant conditioned commercial space is the opposite. It has a meter running.

Things I'd want documented before the LOI becomes a contract, in the order I'd chase them.

The laundromat lease in full, not the abstract. A gross lease at $11 on 3,000 sf with four years left means you're eating operating expenses on that bay and there may be no escalations. Laundromats also use a lot of water and gas, and if that's on a shared meter you're subsidizing a tenant whose margins depend on you doing so. Ask for the last 24 months of utility bills by meter and a meter diagram.

The furniture showroom's exit. Why did it close, was it a lease default, and does the landlord hold a judgment or unpaid TI amortization. Also whether there's an unamortized TI balance on the books, since the seller's NOI presentation may still be carrying it.

Sprinkler and fire separation status for the whole ground floor. A 14 foot ceiling with no dedicated HVAC and 2006-era conversion work means a future food or assembly use triggers a code review, and that cost lands on you, not the tenant.

Tax reassessment on sale. In some states the sale resets the assessed value, in others it doesn't, and it varies by state and sometimes by county. Your $196k residential NOI can lose $15k to $25k overnight if you're in a reset state and the current assessment is stale. Call the assessor and ask directly how sales are handled.

On the bank's stabilized DSCR: ask them what market rent and what lease-up period they're using for the vacant 5,000, and what the holdback release conditions are. A holdback that only releases on an executed lease with a rent floor is very different from one that releases on a debt yield test.

Why is the office tenant month to month after presumably several years? Either he asked for that, or the seller kept it flexible for a reason.

The operational thing nobody mentions until they own one: your residential tenants and your commercial tenants call about different things at different hours and you can't use one system for both.

My portfolio is small and I run two mixed-use buildings in it. Residential is maintenance requests, turnovers, screening, and the state landlord tenant rules that go with all of that. Commercial is CAM reconciliations, certificates of insurance you have to chase every year, signage approvals, and lease clauses that only matter once every three years and then matter enormously. At 22 apartments plus three commercial bays you are past the point where you can hold both in your head, and the 8% management number in your underwriting is a residential number. Commercial management is typically quoted separately and higher as a percentage on small square footage, or as a leasing commission plus a flat fee. Get an actual proposal from a manager who does both before you sign the contract, because the difference between 8% and what you'll actually pay could be $12k a year.

Also: 22 units at $350 a year of capex on a 1920s building converted in 2006 is light. The 2006 systems are now nineteen years old. Water heaters, the roof membrane if it was done then, and the common area HVAC are all at or past midlife.

The number that decides this deal is the cost per square foot to make 5,000 sf of dark showroom leasable, and you don't have it yet. Everything else in your post is reasonably built.

A 14 foot glass box with no dedicated HVAC is a shell in commercial terms. Whoever leases it needs rooftop units or split systems, a code-compliant means of egress for the intended occupancy, separate electrical service and metering, and restrooms sized for the use. Depending on the market and the tenant, that lands somewhere in a wide range per square foot, and the tenant pays part of it only if they are strong enough to want to. Get a general contractor to walk it with you during due diligence and price two scenarios: single tenant shell delivery, and demising into three bays with separate services. The demising quote you were given verbally at $200k is the one to test, because demising walls are cheap and separate utility services are not.

On the bank's stabilized DSCR, everything hinges on their market rent for the vacant space. If they underwrite $15 NNN on 5,000 sf and you can only sign $10 with $40/sf of landlord work, the lease-up holdback never fully releases and you have refinance risk at year five with recourse attached. Ask them in writing for the market rent, the lease-up period, the release conditions, and whether TI and leasing commissions are fundable from the holdback. Lenders differ substantially on all four and terms move, so get it from your lender rather than from a thread.

The zoning changes you mention cut both ways. Loosened height and no parking minimums in that district make your site more valuable and also make it cheaper for someone to build competing ground floor retail nearby. Ask the planning department what's in the pipeline within a half mile.

Dumb question, does the laundromat's four years left mean you can't raise that rent at all until then?

The 5,000 sf box is a job, and I want income instead. A three year one, probably.

On the buildout, price the things that aren't on the drawing. In a 1920s building the ceiling height that makes the space attractive is the same height that makes the HVAC load ugly, and 14 feet of glass on the street side is a heating bill nobody models until January.

The scope creep pattern I've hit twice on ground floor commercial: you open the ceiling to run new ductwork and find the original structure won't take the rooftop unit weight without reinforcement. That's a structural engineer, a permit revision, and eight weeks. Then the electrical service to the building turns out to be sized for a 2006 conversion with one retail tenant, and separating three bays means a new service from the utility, which is a queue you don't control. I've waited five months for a transformer.

So when you get your GC number, ask him specifically about roof structure at the rooftop unit locations and about the size of the existing service. Those two answers move the estimate more than the finishes. And whatever number he gives, the version with three tenants instead of one costs more than three times the version with one, because each tenant brings their own permit set and their own delays.

I had to read this twice. When you say you're carrying the month to month tenant at zero, does that mean you also removed his $1,400 from the seller's NOI to get your $218k?

Answering thicket's point from the management side, since this is what I do.

On a 22 unit residential plus three commercial bay building, I'd quote residential at a percentage of collected rent and the commercial separately, usually a flat monthly per bay plus a leasing commission on new leases and a smaller one on renewals. The commission is the part owners forget. Retail leasing commissions are typically a percentage of total lease value paid at signing, and if you sign a five year lease on 5,000 sf at $15, that check is not small and it comes out of your pocket in the same quarter you're paying for the buildout. Budget it as part of the lease-up cost, not as an operating expense.

The certificate of insurance chase is the other thing. Every commercial tenant's policy needs you named as additional insured and it needs renewing annually. On a laundromat especially, because the water damage claim that runs into your apartments upstairs is the single most likely bad event in this building. Read the laundromat lease for who's responsible for the supply lines and the floor drains, and find out whether there's a waterproof membrane under that slab. If there isn't, you'll learn about it through your residential tenants' ceilings.

And on your 6% residential vacancy, check what the actual turnover cost is in that submarket. 6% economic vacancy is fine if turns are cheap and fast. If units sit three weeks and cost $1,800 to turn, your effective number is higher.

The thing that would stop me is full recourse on a 5-year fixed where the exit depends on leasing space you don't have a tenant for.

You're taking equity risk on the ground floor and personal liability on the debt at the same time. If the box leases, you refinance at year five into a much better building and the recourse question goes away. If it doesn't, you're refinancing 22 units and a laundromat at whatever rates exist in five years, with your signature on the note, in a district where the zoning changes you like are also letting someone build newer ground floor space two blocks over.

I'd ask the bank two things. What would it take to get recourse burned off at a defined debt yield or occupancy test, and would they price a longer term if you accepted a lower proceeds number. Some banks will do a burn-off, some won't touch it, and it depends on the institution rather than the market. Get whichever answer in writing.

Separately, the price. At $2.9M you're paying roughly $132k a unit for the apartments if the ground floor is worth zero, which for a converted 1920s building with nineteen year old systems in a secondary midwest downtown may or may not be a bargain. Work out that per-unit number against recent apartment sales in the same submarket. If it's at or under residential comps, the ground floor really is an option and the deal makes sense even if you never lease it. If it's above, you're paying for the box in advance.